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Doug Kass's Killer Shorts - Barron's

I like Mr. Kass's shorts, at least he's original...
Quick note re: Fastenal. Shorting Fastenal is a tough way to make a living. I'd much rather short HD, LOW or even homebuilder stocks. If FAST has a bad day, HD and LOW will likely suffer in sympathy. But, wait, these stocks are probably shorted by everyone and their brother, so Mr. Kass is worried about losing money on a short covering rally.

One correction that I'd like to suggest...Berkshire did not lose 1.6 bilion on derivatives contracts. It sold equity puts on major US indices for 20 year periods and got premiums upfront. These contracts are essentially like selling an insurance policy to someone. Buffet gets to invest the float for 20 years and may not even have to pay anything (and will likely make 3x-4x by investing the float). The The 1.6 billion "loss" is just the fair value accounting at work and will likely fluctuate up and down every now and then. Outside of the up-front premium, no money changes
hands till contracts are settled.


Pasting from Berkshire's 10-Q:
"The estimated fair value of the equity index put option contracts at March 31, 2008 was approximately $6.2 billion, an increase of $1.6 billion since December 31, 2007. The increase was primarily due to fair value losses of $1.2 billion as well as $383 million in premiums from new contracts entered into in 2008. There were no cash payments made under the equity index put option contracts.
The aforementioned contracts are not traded on an exchange. The contracts were entered into with the expectation that amounts ultimately paid to counterparties for actual credit defaults or declines in equity index values (measured at the expiration date of the contract) will be less than the premiums received. The contracts generally may not be terminated or fully settled before the expiration dates (up to 20 years in the future with respect to equity index put option contracts) and therefore the ultimate amount of cash basis gains or losses will not be known for years.
Berkshire does not actively trade or exchange these contracts, but rather intends to hold such contracts until expiration. Nevertheless, current accounting standards require derivative contracts to be carried at estimated fair value with the periodic changes in estimated fair value included in earnings. Fair value is estimated based on models that incorporate changes in applicable underlying credit standings, equity index values, interest rates, foreign currency exchange rates, risk and other factors. The fair values on any given reporting date and the resulting gains and losses reflected in earnings will likely be volatile, reflecting the volatility of equity and credit markets. Management does not view the periodic gains or losses from the changes in fair value as meaningful given the long term nature of the contracts and the volatile nature of equity and credit markets over short periods of time."